People with larger pension pots, particularly people who own their own business, can choose to move their savings into a SIPP or SSAS pension scheme. The advantage of this is that they can select exactly what their pension fund invests in – and this can include direct ownership of Commercial Property.
For people who own their own business, the attraction of using their pension to own their business premises is obvious. A ‘place’ for any business – be it an office or factory – is likely one of the biggest costs they pay, right behind the ‘people’ that work there. If you have to pay rent to someone, it may as well be your own pension!
However, investing in commercial property can bring VAT obligations. Depending on how the underlying trust that governs your SIPP or SSAS is constituted, you may be obliged to register your pension fund for VAT and make quarterly VAT Returns to HMRC. Some SIPP or SSAS providers handle VAT on behalf of the pension schemes they administer, others require member trustees to make their own arrangements.
If you have to manage your pension fund’s VAT position, engaging an advisor who understands the quirks that relate to SIPP and SSAS pensions can be a wise investment. These are five of the pitfalls your advisor should look out for.
Where a SIPP or SSAS is dealing with connected party tenants then the tenant’s VAT position can have consequences for the pension fund. If the tenant operates in a VAT exempt industry, then tax anti-avoidance rules can come into play. Situations can arise where the pension is barred from charging VAT on rent and recovering VAT on costs.
At the extreme, this can mean that VAT on an initial property purchase is not recoverable. It can also mean Transfer of a Going Concern (TOGC) conditions are not met; again, this can mean VAT becomes payable on the purchase and cannot be recovered.
These VAT losses will impair the commercial rationale for buying a property. If the pension proceeds with a ‘losing’ deal, and suffers a VAT cost in doing so, then arguably it has not acted entirely for its own benefit but for the benefit of its connected tenant. This situation can, in turn, create an unauthorised payment from the fund, which triggers further tax charges on top of the VAT loss.
Buying a property requires a significant amount of funding and even people with larger pension pots may not be able to fund a purchase on their own. It is therefore very common for two or more pensions to work together as a ‘group’ or ‘syndicate’ to finance an investment. It is also possible for a pension to team up with private individuals and/or limited companies to form a property syndicate. In these scenarios it is tempting to think that each person should register for VAT individually.
Joint owners are actually required to register for VAT as a ‘Partnership’. This requirement holds even if the ownership does not meet the legal definition of Partnership in its broader sense. Partnership is the closest VAT Registration option to the commercial reality, therefore this is what HMRC insist on.
Even if joint owners register for VAT individually and pay the right amount of VAT overall, the VAT has been paid in the wrong place. This means HMRC can charge penalties and interest on ‘late’ payment because the ‘right’ person hasn’t paid VAT on time.
The first review point on most VAT calculations is making sure that the correct VAT has been accounted for on any income (and that the correct VAT has been charged to customers/tenants).
A common income pitfall for SIPP and SSAS is failing to deal correctly with recharges from landlord to tenant. For example, a landlord might insure their property, then pass the cost down to their tenant. Insurance contracts are exempt from VAT therefore the landlord doesn’t pay any VAT on the premium they pay. It is tempting, therefore, to recharge the insurance to the tenant on a VAT Exempt basis. However, this is not correct.
Insurance exemption only applies to the insurance company. Anything thereafter is a separate transaction and has to be dealt with on its own facts. The landlord of a property is not writing an insurance contract, they’re recharging a cost they’ve paid. Therefore, they should charge VAT on the same basis as they do with rent: VAT Exempt, unless they’ve notified Option to Tax on the property in question.
A second common pitfall is to assume that if there is no Option to Tax on the land then the rent will be exempt from VAT. Sadly, this is not always the case. Car parking and grazing land are examples where the VAT liability is not dependent on Option to Tax, therefore the VAT position on anything other than a ‘straight’ lease should be reviewed. We debunk some of the common myths about Option to Tax in a separate article.
If a SIPP or SSAS is registered for VAT, it can be tempting to think it can recover all the VAT on any costs it pays. Unfortunately, the law is not so simple. VAT can only be recovered when it is ‘attributable’ to the commercial property ‘business’ conducted by the pension.
For example, a pension may hold investments in stocks and shares alongside its commercial property. The VAT on any fees for managing these investments is not recoverable because it is regarded as ‘non-business’. The passive holding of shares does not require ‘economic activity’ (in contrast to a directly owned property which has to be actively managed) and therefore recovery of VAT on costs is precluded.
Depending how many properties a pension fund owns, and what VAT is charged on the rental income from these, it may not be able to recover VAT on all property costs. VAT registered SSAS funds providing loan back to their sponsoring employer can also find that VAT on some costs becomes irrecoverable. In VAT speak this is known as Partial Exemption.
For example, if a pension owns two properties where the income from one is taxable for VAT and the other is exempt, then, VAT on costs has to be ‘attributed’ between the two properties. Any VAT on a cost incurred specific to the taxable property can generally be recovered. Any VAT on a cost incurred specific to the exempt property should be disclaimed in the first instance. Any VAT on a cost that relates the properties collectively, for example portfolio valuation, is known as ‘residual VAT’ and should be split between the properties via a Partial Exemption calculation.
The Partial Exemption calculation determines how much of the residual VAT can be recovered. Depending on the result, it can arise that all the VAT incurred can be recovered – even VAT relating to the exempt property.
However, the calculation is not always done meaning that recoverable VAT can be left on the table, or, VAT might be overclaimed which implies a risk that HMRC will charge penalties and interest.
The final area where caution should be exercised relates to situations where the pension fund pays costs that do not ‘belong’ to it. This most commonly occurs with bank borrowings and financial advisor fees.
If a pension fund is borrowing money from a bank to fund a property investment, the fund may have to pay some of the arrangement costs incurred by the bank. Where the bank charges an ‘arrangement fee’ to the pension there is not generally any VAT issue because the bank will charge its fee on a VAT Exempt basis.
However, it is more usual for banks to arrange surveyor valuations and solicitors to draw up the loan agreements/deal with legal charges on the property – then pass the fee notes to the borrower for them to pay. It is important to recognise that although the surveyors and solicitors have charged VAT on their fees, and payment is being made by the pension, the professionals have been working for the bank not the pension. This means the VAT on their bills does not ‘belong’ to the pension and therefore the pension should not recover it – even if it will be charging VAT on any income generated by the property being acquired.
The second common scenario where a pension fund pays costs on behalf of someone else is for the ongoing charges of a Financial Advisor. Not all IFA charges are subject to VAT so the question of recovery may not arise. However, if an IFA has charged VAT on a fee being paid by the pension it is essential to understand what exactly the IFA is charging for. If their fee relates to the ongoing management of the commercial property investments owned within the pension fund then VAT recovery can be considered.
Commonly, though, the fee from the IFA is actually for advice and retirement planning provided to the members of the pension fund. As the IFA is working for the pension members as individuals, rather than the pension fund itself, any VAT should not be reclaimed. As with the bank example, any VAT on these costs does not ‘belong’ to the pension fund and therefore the pension should not recover it.
As ever with VAT, it is often best to appoint a professional to oversee compliance. Over the twenty years life of a pension fund (or more), the costs of professional assistance should largely pay for themselves through maximum recovery of VAT, and minimised risk of penalty charges from HMRC. As always, if you have any questions or don’t know what kind of professional to turn to, we’ll try to point you in the right direction. Give our Associate Director, Iain Harris a call if you have any VAT questions. Call him on 0131 364 4191 or email Enable JavaScript to view protected content.
Please note the above commentary is a general guide only, and should not form the basis of specific decision-making.
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